Square Feet
Finding a Way to Pay for Green Makeovers
By ALEC APPELBAUM
Published: January 13, 2010
Last year, Mayor Michael R. Bloomberg proposed four laws and two programs that would have required the owners of New York’s largest buildings to pay for improvements to make their properties more energy-efficient.
Katie Orlinsky for The New York Times
Sean Neill says efficiency upgrades may require a change in the way leases are written.
The City Council passed a modified version of the proposal in December that required landlords to audit their buildings’ energy use once a decade and publish the results, but made investments to reduce energy waste optional.
Building owners had questioned the feasibility of mandated improvements, arguing that they often bear the burden of paying for investments without any codified way to share costs with tenants.
Sean Neill, a 37-year-old economist who started a consulting company a year ago to address the murky question of how landlords might pay for retrofits, says change will be very difficult to achieve if it does not address the way leases are written.
In most cases, leases put responsibility for capital costs like boilers and air-conditioners on owners and responsibility for operating costs like oil and electric bills on tenants. A list of “recoverable expenses” in a lease often excludes changes to heating, lighting and insulation that can make a building more energy-efficient and pleasant for tenants.
David Cheikin, vice president for leasing at Brookfield Properties, a publicly traded company that owns 20.6 million square feet of New York area office space, including the World Financial Center, said the current lease structure gave owners little incentive to invest in their properties, even as their buildings became the equivalent of gas guzzlers.
“As the stock of office buildings in New York continues to age,” he said, “there’s standard language in a New York City class A office lease that says you can’t throw money into the building and expect tenants to repay it.”
Mr. Neill wants to change that roadblock, which landlords call the “split incentive.” Last fall, the Natural Resources Defense Council, a nonprofit environmental advocacy organization, hired him to hold a forum that brought together major landlords, brokers and tenants to discuss how a “green lease” might work.
Working with the N.R.D.C. and another advocacy group, the Environmental Defense Fund, Mr. Neill’s firm, called Cycle-7, is preparing to discuss with large commercial tenants ways to revise the standard leases used in commercial real estate, developing a way to share the costs and benefits of energy upgrades.
The idea has traction.
“The way existing documents work, you probably would not in many cases have savings going to the guy who owns the more efficient equipment,” said Jonathan Mechanic, head of the real estate practice at the law firm Fried, Frank, Harris, Shriver & Jacobson.
Mr. Neill’s task is complex because landlords hesitate in a weak economy to ask tenants to accept anything that might be an extra expense. “We’re very much in favor of setting up leases like this,” said Mr. Cheikin. “But we’ve had the luxury of being a stable landlord with a large balance sheet.” If he had to scramble for every new tenant to stay solvent, Mr. Cheikin said, the idea of pushing a new kind of lease would be intimidating.
Many landlords and environmentalists expect retrofits will become basic to commercial leasing as the city’s new law takes effect and as more information becomes publicly available about the energy waste in buildings.
“If you publish your data,” Mr. Neill said, “potential tenants will see it and move to a building that works better, or potential investors will press you to improve your building.”
There are many possible approaches to figuring out how to finance improvements. One that Mr. Neill has suggested would involve the city’s forgiving tenants some of their commercial occupancy tax if they agree to help pay for better systems.
“Cycle-7 has a creative concept,” said Mr. Mechanic, the lawyer. “The problem is absent some kind of legislative solution, you’re doing something with a potential for litigation.”
While nobody can force tenants to share costs, Mr. Neill said, companies with global brands will want the halo effect of occupying green buildings, and the skill to discern useful retrofits that might be required under future regulations.
A version of this article appeared in print on January 13, 2010, on page B6 of the New York edition.
Lori Cain is a residential Realtor with Chinowth & Cohen Realtors serving the greater Tulsa Oklahoma area, including midtown Tulsa, Owasso, Broken Arrow, Bixby, Sand Springs and Jenks. Please visit Lori’s web site, LoriCain.com or call 918-852-5036.
